When I noticed that Seeking Alpha contributor Rob Fagan wrote a piece about Netflix (NFLX), I couldn't wait to click and consume insight from an insider's perspective. I knew the name rang a bell. And, after checking Rob's LinkedIn profile, I discovered that, indeed, he worked for Netflix for nearly seven years between June 2003 and May 2010.
Before I discuss Rob's article, I must disclaim. I understand that working as a writer -- whether full-time, part-time, or as a hobby -- is not easy, nor is it for the faint of heart, particularly when you cover stocks and such. Simply put, you deal with a lot of crap! If you didn't understand the way the game works and had thin skin, you could probably file a libel suit daily. That said, before I criticize the work of another writer, I check myself. My history shows that, even if I disagree with another author, I tend to only challenge the argument, not the person. In this case, I primarily stick to the former, however, I think Rob's surface scratch of a write-up says a lot about the culture many high-tech employees run in. It also says a lot about the flimsy platform from which Netflix operates.
I think Rob's article and my response to it rings important for investors because, naturally, investors value an "insider's" point of view. Evidence of this comes every single day on CNBC. When an analyst or an executive, or less, goes on-air and says something even slightly bullish or bearish about a stock, it moves almost immediately in the expected direction. This scares the heck out of me for two reasons: (1) How can a five-minute TV appearance, almost every time, have so much power?; and (2) How can investors be so fickle? While I change my opinion all of the time, I don't do it in response to Jim Cramer yelling "Buy, Buy, Buy!" or Erin Burnett's wardrobe.
Investors should proceed with caution when they read or hear anything, regardless of the source. They should be even more critical when a potential mouthpiece for a company offers a less-than-critical review.
At the outset of his article, Fagan takes an easy shot at Wedbush Securities analyst Michael Pachter, pointing out that Pachter has had a sell rating on Netflix for years. Clearly, Pachter's 2005 price target of $3.00 for NFLX has proved to be more than a bit off. Fagan takes the next intuitive step, linking Pachter's bearishness back then to "the shortsightedness prevalent today" in NFLX short arguments.
Intuition often proves to be a faulty lens through which to view the world. Additionally, history does not always repeat itself.
Just because somebody like Pachter has been "wrong" doesn't mean that he is wrong. Investors must separate Pachter's (or Len Brecken's) argument from his prediction. The argument, while subject -- rightfully -- to scrutiny and debate, still holds. The prediction is little more than the conclusion people like Pachter logically draw from their arguments. One day, events might play out that prove Pachter and similar NFLX bears right; whether or not their predictions come true is another matter entirely. Throughout history, a handful of people warned others about the biggest frauds and improprieties of our time before they happened. It takes guts to stick to the story and your convictions when everybody's not-so-politely asking you to shut up.
While Fagan and others might find it fun to infer that people like Pachter are idiots, it's an intellectually lazy and disingenuous way to make your case.
Fagan goes on to explain that NFLX shorts continue to miss a couple key points, including the notion that "Netflix is disrupting existing channels by building a totally new mechanism for the delivery of entertainment."
Exactly what is Netflix "building?"
To contend that Netflix builds anything borders on comical. Netflix hardly invented streaming. If they deserve credit for anything -- and this, too, should be up for debate -- it's the decision to abandon DVD rentals and jump on the online streaming bandwagon before many of their competitors did.
While an idea or an aggressive approach surely represent components of "building" something, they represent a mere sliver. Google (GOOG) builds things. Apple (AAPL) builds things. Amazon.com (AMZN) builds things. Microsoft (MSFT) builds things. Firms, such as Intel (INTC), Cisco (CSCO), and Akamai (AKAM), that run behind the scenes in the minds of consumers, build things. Industrial firms and consumer staples/products companies build things. They build hardware, software, architecture, platforms, and actual "things" of tangible value. They have meaningful assets.
I have scoured every line of Netflix's SEC filings and other official documents. I cannot find any business lines other than DVD rentals and the decision to stream content that somebody else produces via methods somebody else built and helps Netflix facilitate. I can't find something like Amazon Web Services, an in-house Cloud, or even a car that drives itself. At the end of the day, Netflix had -- or has, depending on how you look at it -- a good idea; from there, they merely piggyback on the concrete ideas of other innovators.
Fagan goes on to explain that despite the "mind-boggling" levels NFLX trades at, his "gut" tells him that getting in now might just be "crazy enough to work." He then offers the following disclosure:
(Click to enlarge)
The rest of us do not have "some employee options that expire at the end of the month."
I think this point often gets lost in the arguments we conduct over lofty PPS valuations, questionable business plans, shoddy management, and who is "right" and "wrong." While I doubt Fagan's role had him in (A) constant contact with Netflix CEO Reed Hastings or (B) provided him with millions upon millions of dollars worth of stock options (though I could be wrong), he's probably doing as well if not far better than many of us on his stock options alone. If you're at Hastings' level, multiply this by about 5,000 shares or just over $1 million each week.
Having been exposed to the culture of high-tech/Internet startups to emerging and established companies in one way, shape, or form since 1999, I can tell you that the options even relatively low-level employees receive can cloud judgment. And this is not a shot. I only wish high-tech/Internet employees would be a bit more honest about their obviously-skewed view.
I can say, unabashedly and without shame, that if NFLX made me somewhat wealthy or flat-out rich, I would probably not share my bearish views. Given the way we're made psychologically, I would probably not even have a bearish view. In fact, I would likely be bullish. You can call me an untrustworthy hack, but, if you do, you need to study human behavior a bit more closely.
People like Fagan have an emotional stake in Netflix that's so large, you have to take what they say with an even smaller grain of salt than you do what I say. At this point, other than a tidy ego, folks vested in Netflix have very little to lose. They've already won. Whether or not people stream from their website is inconsequential. Sure, they work long hours and throw themselves, with intensity, into what they do, but, at the end of the day, investors must separate their success, measured in cashed-out options, from the success or failure of the company they work or worked for.